mg Doc 3678 Filed 05/10/13 Entered 05/10/13 11:50:16 Main Document Pg 1 of 52

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1 Pg 1 of 52 MORRISON & FOERSTER LLP 1290 Avenue of the Americas New York, New York Telephone: (212) Facsimile: (212) Gary S. Lee Todd M. Goren Samantha Martin Counsel for the Debtors and Debtors in Possession UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK In re: RESIDENTIAL CAPITAL, LLC, et al., Debtors. ) ) ) ) ) ) ) Case No (MG) Chapter 11 Jointly Administered DEBTORS OMNIBUS REPLY TO RESPONSES TO DEBTORS MOTION FOR ENTRY OF AN ORDER TO PERMIT THE DEBTORS TO CONTINUE USING CASH COLLATERAL TO THE HONORABLE MARTIN GLENN UNITED STATES BANKRUPTCY JUDGE: The debtors and debtors in possession in the above-captioned cases (collectively, the Debtors ) submit this reply (the Reply ) to the responses 1 to the Debtors Motion for Entry of an Order to Permit the Debtors to Continue Using Cash Collateral [Docket No. 3374] (the Motion ). 2 In further support, the Debtors respectfully represent: 1 The Ally Financial Inc. s Limited Objection to Debtors Motion for Entry of an Order to Permit the Debtors to Continue Using Cash Collateral [Docket No. 3623] (the AFI Objection ); and the Objection of Ad Hoc Group of Junior Secured Noteholders to Debtors Motion for Entry of an Order to Permit the Debtors to Continue Using Cash Collateral [Docket No. 3625] (the JSN Objection, and together with the AFI Objection, the Objections ). 2 Capitalized terms used but not defined herein shall have the meaning ascribed to them in the Motion. ny

2 Pg 2 of 52 PRELIMINARY STATEMENT 1. Having received all of the benefit of the tremendously successful sale process run by the Debtors, the Lenders now seek to disclaim responsibility for (i) any unpaid expenses that accrued prior to the Sales, and, amazingly, (ii) the ongoing expenses necessary to preserve and liquidate their remaining collateral. The Lenders make this leap based on a misguided reliance on the Section 506(c) waiver provided by the Debtors in the AFI/JSB Cash Collateral Final Order. However, as was set forth in the Motion and discussed in more detail below, the Debtors need not meet the standard set forth in Section 506(c) in order to be able to use Cash Collateral, nor does the Section 506(c) waiver prevent the Debtors from seeking non-consensual use of Cash Collateral. Moreover, contrary to the Lenders assertions, a Section 506(c) waiver does not mean that unsecured creditors must bear the full cost of these Chapter 11 cases, including the costs of disposing of the Lenders collateral. Rather, the Section 506(c) waiver merely means that the Debtors are not permitted to surcharge the Lenders for any additional costs above and beyond the Cash Collateral used in these cases. If the use of Cash Collateral results in a diminution in the value of the Lenders collateral, then the Lenders are entitled to an adequate protection claim in the amount of such diminution in value. Nothing in the AFI/JSB Cash Collateral Final Order and no case suggests that the Lenders adequate protection claim must be equivalent to the dollar for-dollar use of Cash Collateral. While the Lenders could have negotiated for that in the AFI/JSB Cash Collateral Final Order, such order instead provides that the Lenders adequate protection claim is equal to the aggregate diminution in value of the Prepetition Collateral to the extent of their interests therein. AFI/JSB Cash Collateral Order at While the Debtors believe that their use of Cash Collateral throughout these cases has benefited the Lenders and, as a result, no diminution in the value of their collateral has ny

3 Pg 3 of 52 occurred, that question is not before the Court today. For purposes of the present Motion, all the Debtors must show is that, in the event the Lenders actually do suffer a diminution in the value of their collateral, they are adequately protected. Neither of the Lenders has even attempted to argue that the New AP Package offered by the Debtors is insufficient to cover any such claim. As a result, the Debtors are entitled to the continued use of Cash Collateral. REPLY I. REPLY TO JSN AND AFI OBJECTIONS A. The Lenders Are Adequately Protected 3. There is only one standard for this Court to consider in evaluating the Debtors proposed use of Cash Collateral whether the Lenders interest in the Cash Collateral will be adequately protected. See 11 U.S.C. 363(e). 4. None of the Respondents dispute nor can they that the New AP Package will provide the Lenders with sufficient adequate protection. 3 As explained in the Motion, the Debtors have provided the Lenders ample adequate protection. First, the Lenders are adequately protected by the Debtors proposed use of Cash Collateral for future expenditures solely to preserve, or enhance the value of, and liquidate the Lenders collateral. Courts have routinely held that using cash collateral to preserve a lender s collateral is itself a form of adequate protection. See e.g., In re Salem Plaza Assocs., 135 B.R. 753, 758 (Bankr. S.D.N.Y. 1992); Hartigan v Pine Lake Vill. Apartment Co. (In re Pine Lake Vill. Apartment Co.), 16 B.R. 750, 756 (Bankr. S.D.N.Y. 1982). 5. Second, the Lenders are adequately protected by the substantial equity cushion on the AFI LOC, upon which the Lenders have adequate protection liens. The equity cushion on the 3 While AFI argues in the AFI Objection that the Debtors should not have changed their adequate protection package for procedural reasons, AFI does not dispute that the New AP Package is sufficient. ny

4 Pg 4 of 52 AFI LOC as of December 31, 2012 is approximately $1.285 billion that is, the book value of the collateral over and above the $380 million owed to AFI on the AFI LOC. As several courts have held, the presence of an equity cushion is itself a form of adequate protection. See In re Realty Sw. Assocs., 140 B.R. 360 (Bankr. S.D.N.Y. 1992). In addition, the Debtors currently hold a balance of approximately $750 million in unencumbered cash as of March 31, 2013, which may be used to satisfy any superpriority administrative expense claims. Thus, there is approximately $2 billion in additional value (above and beyond the Lenders prepetition collateral) available to satisfy any adequate protection claim by the Lenders. 6. Third, notwithstanding that the Lenders already are adequately protected by the proposed use of Cash Collateral and the substantial equity cushion on the AFI Senior Secured Credit Facility and the AFI LOC, the Debtors also offered the Lenders the New AP Package, which includes, inter alia, (i) various adequate protection liens, (ii) superpriority administrative expense claims, (iii) with respect to AFI only, adequate protection payments consisting of accrued and unpaid prepetition and postpetition interest at the non-default contract rate, and (iv) with respect to the Junior Secured Noteholders only, adequate protection payments consisting of trustee fees to UMB Bank, N.A., as successor trustee under the JSN Indenture pursuant to the terms of the JSN Indenture Finally, as to AFI, the Proposed Order provides that the Debtors will reserve adequate cash to repay the AFI Senior Secured Credit Facility and AFI LOC (the AFI Reserved Cash ) and will not use such cash without further order of the Court. In light of the AFI Reserved Cash, the Debtors are not seeking to use AFI s Cash Collateral and AFI should not 4 The trustee fees were not included in the Proposed Order previously submitted to the Court. Accordingly, the Debtors have prepared a revised form of the Proposed Order, a copy of which is annexed hereto as Exhibit 1. ny

5 Pg 5 of 52 even have standing to be heard on this matter. At a minimum, there can be no question that AFI is adequately protected. 8. Accordingly, the Debtors submit that the requested use of Cash Collateral and the protections provided to the Lenders are reasonable, appropriate, and sufficient to satisfy the requirement that the Lenders receive adequate protection. B. Section 506(c) Is Inapplicable, and The Debtors Proposed Use of Cash Collateral Does Not Constitute a Surcharge 9. [S]ections 363 and 506 serve distinct purposes and apply in different circumstances. Sec. Leasing Partners, LP v ProAlert, LLC (In re ProAlert, LLC), 314 B.R. 436, 441 (B.A.P. 9th Cir. 2004). Section 363 allows the debtor to use the secured creditor s cash collateral on a temporary basis, while ensuring that the creditor ultimately will receive the full value of its collateral package. Section 506(c), on the other hand, authorizes a debtor to charge the secured creditor with the costs of disposing of its collateral so that the general estate and unsecured creditors [are not] required to bear the cost of protecting what is not theirs. In re Codesco, Inc., 18 B.R. 225, 230 (Bankr. S.D.N.Y. 1982). 10. The Lenders assertions that the Debtors proposed use of Cash Collateral constitutes an impermissible surcharge under Section 506(c) are patently misguided. [I]f the creditor s interest is adequately protected, then, by definition, there is no surcharge and Section 506(c) does not come into play. In re ProAlert, 314 B.R. at 441. See also In re Coventry Commons Assocs., 149 B.R. 109, 114 (Bankr. E.D. Mich. 1992) ( If [creditor s] interest is adequately protected, then by definition there will be no impairment of [creditor s] interest in the nature of a surcharge, or of any other nature. ). 11. The fact that the Debtors intend to use Cash Collateral to pay for the Funded Disposition Costs, which include costs associated with the preservation and disposition of the ny

6 Pg 6 of 52 Lenders collateral, does not impact this analysis. As noted above, the Debtors need only demonstrate that the Lenders have been granted adequate protection in exchange for the use of Cash Collateral. See 11 U.S.C. 363(c)(2), (e). Contrary to the Lenders assertions, the Debtors are not obligated to meet the requirements of Section 506(c) to obtain use of Cash Collateral. See In re Coventry Commons Assocs., 149 B.R. at 114 ( the debtor can use collateral, even cash collateral, as long as the secured creditor s interest is adequately protected. The only limitations upon this right are those found in (c) does not compel a different conclusion. ); In re Gen. Auto Bldg., LLC, 2012 WL , at *2 (Bankr. D. Or. Dec. 28, 2012) ( Debtor seeks to pay its appraiser from [the lender s] cash collateral, which is governed by 363, not 506(c). Section 363 requires adequate protection, not benefit to the creditor. ) (internal citation omitted). Indeed, adoption of the Lenders position would require all debtors to demonstrate that each individual component of the budget satisfied the Section 506(c) requirements a standard much more onerous than proving adequate protection. 12. Section 363 provides that the Court may approve the Debtors use of Cash Collateral to fund any costs regardless of whether they relate to the preservation or disposition of collateral, the operation of the Chapter 11 cases, or otherwise as long as the Debtors grant adequate protection to the Lenders to protect them from any diminution in value. Section 363 does not purport to limit the Debtors proposed use once adequate protection has been provided. While the Lenders have taken particular issue with the Debtors proposed use of Cash Collateral (i) AFI, with respect to the payment of professional fees, indemnification payments to Ally Bank under the Ally Bank Servicing Agreement, and costs related to servicing rights remaining in the Debtors estates (AFI Objection 33), and (ii) the Junior Secured Noteholders, with respect to the payment of expenses that accrued prior to the Sales but remain unpaid as of ny

7 Pg 7 of 52 the date hereof, which the Debtors have proposed to pay using Cash Collateral pursuant to the methodology prescribed in the AFI/JSB Cash Collateral Final Order 5 if this Court determines that the Lenders are adequately protected as required by Section 363(e), these concerns are irrelevant. 13. The Debtors propose to use approximately $214 million 6 of the Cash Collateral of the AFI Senior Secured Credit Facility and Junior Secured Noteholders, 7 and in exchange, the Debtors are providing the Lenders with an adequate protection package worth approximately $2 billion to protect the Lenders against any diminution in the value of their collateral. The question of whether the Lenders have suffered an aggregate diminution in the value of their collateral during these Chapter 11 cases is not before the Court today, but is the subject of the Debtors complaint [Docket No. 3592] and will be determined at an appropriate time. The sole issue raised by the Motion whether the Lenders are adequately protected in the event the Debtors use of Cash Collateral to pay the Funded Disposition Costs results in a diminution in the value of the Lenders collateral has been answered with a resounding yes. 5 While the Junior Secured Noteholders did not raise this issue in the JSN Objection, they have raised this issue with the Debtors several times this week, and the Debtors believe the Junior Secured Noteholders intend to raise this issue at the hearing on May 14, The Debtors also expect to use approximately $13 million of cash held by the Barclays DIP Borrowers (upon which the Lenders have adequate protection and replacement liens) in order to continue to fund certain accrued and unpaid expenses allocated to such entities, as well as costs associated with assets remaining in such entities. While the Lenders have adequate protection and replacement liens on the equity of the Barclays DIP Borrowers, the Lenders do not have liens on the cash or assets held by the Barclays DIP Borrowers, and as a result, the Debtors do not believe they need authority to use such cash pursuant to the Motion. 7 The Debtors are in the process of closing their month end books for April 2013, and as a result, the Debtors are continuing to refine this number. The Debtors expect to file an updated Forecast prior to the hearing on May 14, ny

8 Pg 8 of 52 C. Unsecured Creditors Are Not Required to Fund the Full Costs of the Chapter 11 Cases, As Well As the Costs of Disposition of the Lenders Collateral 14. Contrary to the Lenders assertions (AFI Objection 24; JSN Objection at 9-10), there is no requirement in the Bankruptcy Code or case law that requires the Debtors to pay for the Funded Disposition Costs, which include the costs associated with the preservation, maintenance, and disposition of the Lenders collateral, using the estate s unencumbered funds The Lenders fabricate this argument by asserting that the Debtors are surcharging them for disposition costs in violation of the Section 506(c) waiver. However, contrary to the Junior Secured Noteholders assertions, the use of Cash Collateral to pay the Funded Disposition Costs is not and indeed, there is no such thing as a prospective surcharge under Section 506(c). See JSN Objection at 4. A Section 506(c) surcharge permits a debtor to recoup additional disposition costs at the end of the case, and this provision is commonly waived where, as here, the lenders authorize the debtors to use cash collateral to ensure that the lenders are not charged twice for the disposition costs. The concept of a prospective surcharge makes no sense it is simply a use of Cash Collateral, which, as discussed above, is governed by an entirely different standard. 16. The Lenders also argue that the Debtors must replenish the cash collateral used to pay administrative expenses on a dollar for dollar basis and that the Debtors failure to repay the Lenders for the use of Cash Collateral, effectively surcharg[es] the Lenders collateral. JSN Objection at 18; AFI Objection 23. Contrary to the Lenders assertions, the use of Cash Collateral is not a loan, and the Debtors are not obligated to repay the Lenders for each dollar 8 In support of this proposition, the Junior Secured Noteholders cite only two authorities, which are completely inapposite: (i) In re Flagstaff Food Service Corp., 739 F.2d 73 (2d Cir. 1984), and (ii) Collier on Bankruptcy (16 th ed. rev. 2012). JSN Objection at 9. Each of these authorities address only what is recoverable under Section 506(c) and are unrelated to the use of cash collateral and the calculation of adequate protection claims, which are the only potential considerations here. ny

9 Pg 9 of 52 of Cash Collateral spent. Rather, case law suggests that the Debtors should provide the Lenders with adequate protection that provides dollar for dollar protection against any potential diminution in the value of their collateral. See In re ProAlert, 314 B.R. at 439. The Debtors have met this requirement. 17. AFI misconstrues several cases in an attempt to find support for the proposition that the Debtors must repay the Lenders, on a dollar for dollar basis, for the use of Cash Collateral. First, AFI quotes from In re Harbour E. Dev., Ltd., 2011 WL , at *4 (Bankr. S.D. Fla. Dec. 6, 2011) for the proposition that use of cash collateral requires dollar-for-dollar adequate protection in the form of new collateral. AFI Objection 28. As an initial matter, the quote cited by AFI is from a parenthetical that the court prepared to describe the case of Desert Fire Prot. v. Fontainebleau Las Vegas Holdings, LLC (In re Fontainebleau Las Vegas Holdings, LLC), 434 B.R. 716, 727 (S.D. Fla. 2010). By putting this language in quotes, AFI would have the Court believe that this was a finding made by the Fontainebleau court which it was not; in fact, the court in Harbour recognized that a lender is entitled to dollar-for-dollar protection from the diminishment in its cash collateral and says nothing about a requirement that the debtor repay, on a dollar-for-dollar basis, the cash used to fund the Chapter 11 cases WL , at *4 (emphasis added). Putting aside the questionable tactic of quoting a parenthetical as if it were a legal conclusion, the Harbour court s characterization of the Fontainebleau decision is incorrect as the page cited in Harbour references certain arguments made by secured lenders on appeal and is not a conclusion, holding or finding of the court. As in Harbour, the court in Fontainebleau says nothing of a requirement that the funds used to pay administrative expenses be replenished on a dollar for dollar basis in order to adequately protect the Junior Secured Noteholders or AFI. AFI similarly misconstrues the ProAlert case, which provides that ny

10 Pg 10 of 52 the Debtor must replenish any funds used for payments to the two professionals no later than December 31, 2002, on a dollar for dollar basis. In ProAlert, it is clear that these payments are adequate protection payments that were prescribed by the cash collateral order, and not payments that need to be made by all debtors in all cases. 18. In contrast, the AFI/JSB Cash Collateral Final Order does not prescribe a dollar for dollar replenishment of Cash Collateral used as a form of adequate protection. Rather, the AFI/JSB Cash Collateral Final Order provides that the Lenders would receive adequate protection of their interests in the Prepetition Collateral, including Cash Collateral, in an amount equal to the aggregate diminution in value of the Prepetition Collateral to the extent of their interests therein, including any such diminution resulting from the sale, lease or use by the Debtors (or other decline in value) of any Prepetition Collateral, including Cash Collateral, the priming of the AFI Lenders liens on the AFI LOC Collateral by the Carve Out and AFI DIP Loan, and the automatic stay pursuant to section 362 of the Bankruptcy Code... AFI/JSB Cash Collateral Final Order 16. As discussed above, the Debtors have already provided the Lenders with adequate protection in an amount significantly greater than any potential diminution in value. Moreover, the relevant inquiry here is whether the Lenders suffered an aggregate diminution in the value of their collateral during the pendency of the Chapter 11 cases. In no instance will the Debtors be required to repay to the Lenders the amount of Cash Collateral used absent a finding that the Lenders collateral decreased in value in the aggregate as a result of such use. 19. While not before the Court in this Motion, in making any such diminution in value determination, the Lenders fail to recognize that, in the sale context, the value of their secured claim must be determined based on the net proceeds realized on such collateral. See 11 ny

11 Pg 11 of 52 U.S.C. 506(a) ( [a]n allowed claim of a creditor secured by a lien on property in which the estate has an interest... is a secured claim to the extent of the value of such creditor s interest in the estate s interest in such property.... Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property... ) (emphasis added). Accordingly, any funds spent that were necessary to liquidate the collateral must necessarily be taken into account in determining a diminution in value claim, and the Debtors need not replace each dollar of Cash Collateral used. See In re Wrobel, 2007 WL , at *2 (Bankr. S.D. Cal. Aug. 3, 2007) ( It is clear that commissions and costs come off the top of revenues generated by a sale, whether a voluntary sale by the debtor or one occasioned by a foreclosing creditor. In either instance, in calculating adequate protection of a lienholder, those expenses should be considered. ); La Jolla Mortg. Fund v. Rancho El Cajon Assocs., 18 B.R. 283, 289 (Bankr. S.D. Cal. 1982) (in valuing the collateral to determine whether there was an equity cushion sufficient to provide adequate protection, the court reduced the value of the property by an amount sufficient to cover the usual costs of foreclosure and sale. ); Matter of Keystone Camera Prods. Corp., 126 B.R. 177, 184 (Bankr. D.N.J. 1991) (holding that the value ascribed to collateral... should be the value that the secured creditor is likely to realize if it obtained possession of the collateral and moved forward with a commercially reasonable liquidation under commercially practical and reasonable circumstances. ). D. The Debtors Proposed Use of Cash Collateral, And the Debtors Suggestion that They May Return the Collateral to the Lenders, Is Consistent with the Debtors Fiduciary Duties 20. The Debtors agree with the Lenders assertions that the Debtors owe fiduciary duties to their entire estates and must preserve property of the estates for all stakeholders. See AFI Objection 29-31; JSN Objection at 8-9. See e.g., In re MF Global Holdings, Ltd., 2011 WL , at *3 (Bankr. S.D.N.Y. Dec. 14, 2011) ( The Chapter 11 Trustee must operate the ny

12 Pg 12 of 52 Debtors estate with the goal of maximizing the recovery of all creditors. ); Pereira v. Foong (In re Ngan Gung Rest.), 254 B.R. 566, 570 (Bankr. S.D.N.Y. 2000) ( A trustee also owes a fiduciary duty to each creditor of the estate. ) Indeed, the Debtors are acutely focused on fulfilling their fiduciary duties to all creditors of the estates, including secured creditors. For example, the Debtors recently made a significant effort to monetize certain of the Lenders collateral, the FHA Loans, for the highest possible value. In January 2013, the Debtors established procedures to sell approximately $130 million of their FHA Loans. Based on the bids received, the Debtors believed that preserving the FHA Loans and monetizing them in the normal course would maximize their value The Debtors, however, strongly disagree with the Lenders assertions that it is in the best interest of the Debtors estates to use unencumbered cash to preserve and maintain the value of the Lenders collateral (AFI Objection 31; JSN Objection at 11), particularly where, as here, the Debtors believe the Junior Secured Noteholders are undersecured. See e.g., Grochocinski v. Laredo (In re Laredo), 334 B.R. 401, 414 (Bankr. N.D. Ill. 2005) (holding that proof that a debtor lacks equity in property establishes a prima facie case that the property is of inconsequential value and benefit to the estate and should be abandoned ) (citing In re Paolella, 79 B.R. 607, 610 (Bankr. E.D. Pa. 1987)); McGahren v. First Citizens Bank & Trust Co. (In re Weiss), 111 F.3d 1159, 1168 (4th Cir. 1997) (affirming the district court s and bankruptcy 9 The Debtors are not, by this Motion, proposing to abandon the Lenders collateral. The Debtors merely propose that, in the event the Debtors determine in their business judgment that the continued preservation, maintenance and disposition of the Lenders collateral will not maximize value for the Debtors estates and creditors, the Debtors may file a motion with this Court seeking to return certain collateral to the Lenders, including the FHA Loan collateral, so the Lenders can liquidate the collateral themselves. 10 Typically, the FHA Loans would monetize over a period of approximately months. Because these loans are governmentally insured, the Debtors believe that their value is relatively stable, and the Debtors believe they likely would realize close to the carry value on the FHA Loans over time if monetized by the Debtors in the ordinary course. See Declaration of Marc D. Puntus in Support of the Debtors FHA Loan Sale [Docket No. 2545]. ny

13 Pg 13 of 52 court s determination that abandonment of the asset was proper where the property s liens exceeded its value and that the property therefore was of inconsequential value to the estate. ). 23. The Lenders propose contrary to common sense that the unsecured creditors will benefit if the Debtors use unencumbered funds (i.e., real dollars) to enhance the value of the unsold collateral in order to decrease the Junior Secured Noteholders deficiency claim (i.e., bankruptcy dollars). This is simply not true. Any dilution suffered by the unsecured creditors on account of the Junior Secured Noteholders increased deficiency claims will be much less significant than the Debtors expenditure of millions of dollars for the preservation of assets that will in no way benefit the majority of the creditors. As a result, to the extent the Debtors no longer have the ability to use Cash Collateral to pay the Funded Disposition Costs, the Debtors may seek to return the collateral to the Lender pursuant to a separate motion. In such circumstances, having prevented the Debtors from using Cash Collateral to fund the disposition of such assets, the Lenders will be free to argue at that time that any proposed abandonment of collateral is inconsistent with the Debtors fiduciary duties or other applicable law. 24. For the reasons stated above, the Debtors submit that the proposed use of Cash Collateral is in the best interests of their estates and creditors. See Matter of Senior G&A Operating Co., Inc., 957 F.2d 1290, 1298 (5th Cir. 1992) ( The underlying rationale for charging a lienholder with the costs and expenses of preserving or disposing of the secured collateral is that the general estate and unsecured creditors should not be required to bear the cost of protecting what is not theirs. ) (quoting In re Codesco, Inc., 18 B.R. 225) In their objection, the Junior Secured Noteholders fabricate discovery disputes for no apparent reason other than to disparage the Debtors, particularly given the limited (if any) evidentiary issues raised by the Motion. Specifically, they assert that the Debtors failed to comply with the discovery deadlines set forth in the Fifth Stipulation and Order Amending the AFI DIP and Cash Collateral Order [Docket No. 3534]. The Debtors were, however, in substantial compliance with the discovery deadlines. The Debtors provided the Lenders with a multitude of documents in response to their discovery requests, and have timely responded to several of the Junior Secured Noteholders follow up discovery requests. The Debtors additionally facilitated direct discussions between their financial advisors and ny

14 Pg 14 of 52 II. ADDITIONAL REPLY TO AFI S OBJECTION A. The Debtors Do Not Seek to Amend the AFI/JSB Cash Collateral Final Order 25. The Debtors believe that the Motion, which requests entry of a new cash collateral order, was procedurally proper. Contrary to the assertion raised by AFI, the Court may enter the Proposed Order without being required to undertake an analysis under Federal Rule of Civil Procedure 60(b). See Fed. R. Bankr. P (applying Fed. R. Civ. P. 60 to cases under the Bankruptcy Code). Through the Motion, the Debtors request entry of an entirely new order that permits the Debtors to use Cash Collateral on a nonconsensual basis and grants the Lenders a New AP Package. The relief requested in the Motion is vastly different from the relief granted in the consensual AFI/JSB Cash Collateral Final Order. 26. The Lenders and the Debtors have already entered into a stipulation that provides for the termination of the AFI/JSB Cash Collateral Final Order effective as of May 14, See Fifth Stipulation and Order Amending the AFI DIP and Cash Collateral Order [Docket No. the financial advisors for the Junior Secured Noteholders to respond to questions raised by the Junior Secured Noteholders and explain the data provided to them in discovery. The Debtors also offered their two witnesses for depositions within the designated time period; however, the deposition of Jill Horner, originally scheduled for April 30, 2013, needed to be rescheduled to May 8, 2013 because Ms. Horner suffered an injury and was unable to travel on the date originally scheduled. The Debtors learned of Ms. Horner s injury on Sunday, April 28, 2013 and advised the Junior Secured Noteholders that same day. No objection to the rescheduling of the deposition was ever raised. The Debtors offered Ms. Horner for deposition on May 7, 2013 after the exclusivity hearing before this Court, but the Junior Secured Noteholders instead opted to take Ms. Horner s deposition on May 8, The deposition of Marc D. Puntus was originally scheduled for Thursday, May 2nd but was rescheduled due to a mediation session scheduled for that day by Judge Peck. The Debtors offered Mr. Puntus on Friday afternoon, May 3, The Junior Secured Noteholders instead elected to take the deposition on Monday, May 6, 2013 (and the deposition did, in fact, take less than 3 hours). Prior to the filing of the JSN Objection, the Junior Secured Noteholders did not raise any issues with the Debtors related to their compliance with the discovery schedule, did not object to the rescheduled deposition of Ms. Horner or request an alternate witness, and did not seek this Court s assistance in facilitating their discovery efforts. At any rate, the Debtors believe (and understand that the other parties agree) that there should be no evidentiary issues if the Debtors are correct as to the proper standard to be applied. In the event another standard must be applied, there could be limited evidentiary issues in need of resolution. 12 The Debtors were in danger of breaching a covenant related to the deadline for an effective plan of reorganization, which was required to occur by December 15, See AFI/JSB Cash Collateral Final Order 18(ix). Since that date, the Lenders and the Debtors have been entering into stipulations to permit the use of Cash Collateral on a consensual basis on an approximately month-by-month basis. ny

15 Pg 15 of ]. AFI s assertion that the Debtors did not reserve their right to seek Court approval for the continued use of Cash Collateral after a Termination Event (as defined in the AFI/JSB Final Cash Collateral Order) (AFI Objection 15) is incorrect and belied by the express provisions of the AFI/JSB Final Cash Collateral Order. Paragraph 24 of the AFI/JSB Final Cash Collateral Order provides that [n]othing in this Final Order shall be deemed to waive, modify or otherwise impair the respective rights of the Debtors under the Existing Agreements, and the Debtors expressly reserve all rights and remedies that each has now or may have in the future under the Existing Agreements and/or applicable law (subject to paragraphs 5 and 27). AFI/JSB Final Cash Collateral Order 24 (emphasis added). This paragraph expressly preserves the Debtors ability to seek remedies under applicable law, which they seek to do here pursuant to Section 363. See 11 U.S.C. 363(c)(2), (e) (permitting the Debtors seek entry of an order authorizing the use of Cash Collateral on a nonconsensual basis so long as the Lenders are adequately protected). 27. Similarly, AFI s assertion that the Proposed Order impacts the rights and remedies granted to them under the AFI/JSB Cash Collateral Final Order is inaccurate. The Debtors intend for the Original AP Package to govern the Lenders rights with respect to Cash Collateral used by the Debtors in accordance with the AFI/JSB Cash Collateral Final Order, and for the New AP Package to govern the Lenders rights under the Proposed Order on a going forward basis. 28. Simply, the Debtors are requesting entry of the Proposed Order pursuant to Bankruptcy Rule 4001 and Local Rule 4001(b)(1) to grant the Debtors authority to use Cash Collateral on a nonconsensual basis relief separate and apart from the relief granted under the AFI/JSB Cash Collateral Final Order. See Fed. R. Bankr. P. 4001(b)(1)(A) ( A motion for authority to use cash collateral shall be made in accordance with Rule 9014 and shall be ny

16 Pg 16 of 52 accompanied by a proposed form of order. ). Thus, the objections raised by AFI on this ground should be overruled. 13 CONCLUSION WHEREFORE, the Debtors respectfully request that the Court overrule the Objections and grant the relief requested in the revised Proposed Order, a copy of which is annexed hereto as Exhibit 1, and grant such other and further relief as is just and proper. New York, New York Dated: May 10, 2013 /s/ Gary S. Lee Gary S. Lee Todd M. Goren Samantha Martin MORRISON & FOERSTER LLP 1290 Avenue of the Americas New York, New York Telephone: (212) Facsimile: (212) Counsel to the Debtors and Debtors in Possession 13 However, to the extent the Court deems the Motion a request for entry of an amendment to the existing AFI/JSB Cash Collateral Final Order (as such order has been amended, and the effectiveness of which has been extended pursuant to the AFI/JSB Cash Collateral Stipulations), the Debtors submit that the standard under Fed. R. Civ. P. 60(b) has been satisfied. See Rupert v. Krautheimer (In re Krautheimer), 210 B.R. 37, 43 (Bankr. S.D.N.Y. 1997) (holding that a movant under Rule 60(b)(6) must show extraordinary circumstances justifying relief or extreme and undue hardship ) (citing Nemaizer v. Baker, 793 F.2d 58, 63 (2d Cir. 1986)). Here, there clearly have been extraordinary circumstances justifying a modification of the AFI/JSB Cash Collateral Order the Lenders now refuse to consent to the continued use of Cash Collateral during the remainder of the Chapter 11 cases. Whether referred to as an entirely new Proposed Order (which it is) or a modification of the existing order under Rule 60(b), the Lenders position in these Chapter 11 cases have changed and the Debtors are compelled to seek authorization to use Cash Collateral on a nonconsensual basis. ny

17 Pg 17 of 52 EXHIBIT 1 ny

18 Pg 18 of 52 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK In re: ) Case No (MG) ) RESIDENTIAL CAPITAL, LLC, et al., ) Chapter 11 ) Debtors. ) Jointly Administered ) ORDER AUTHORIZING THE DEBTORS TO CONTINUE USING CASH COLLATERAL Upon the motion (the Motion ), 1 dated April 8, 2013, of the above-captioned debtors and debtors in possession (collectively, the Debtors ) filed in these chapter 11 cases (the Chapter 11 Cases ) for entry an order under sections 105, 361, 362, and 363(c) of title 11 of the United States Code (the Bankruptcy Code ), and Rules 2002, 4001, 6004, and 9014 of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules ), seeking that the Court: (i) authorize the Debtors to continuing using Cash Collateral (as defined herein) as set forth herein, and (ii) provide adequate protection in the form of the New AP Package to (a) AFI, in its capacity as lender under the AFI Senior Secured Credit Facility, (b) AFI, in its capacity as lender under the AFI LOC, and (c) the Junior Secured Noteholders, each effective as of May 15, 2013 (collectively, the Lenders or the Adequate Protection Parties ). WHEREAS, on May 16, 2012, the Court entered the Interim Order Under Sections 105, 361, 361, 363, and 364 of the Bankruptcy Code and Bankruptcy Rules 2002, 4001, 6004, and 9014 (I) Authorizing the Debtors to Obtain Postpetition Financing on a Secured Superpriority Basis, (II) Authorizing the Debtors to Use Cash Collateral, (III) Granting Adequate Protection to Adequate Protection Parties and (IV) Prescribing the Form and Manner of Notice and Setting Time for the Final Hearing [Docket No. 89]; 1 Capitalized terms used but not otherwise defined herein have the meaning ascribed to such terms in the Motion. ny

19 Pg 19 of 52 WHEREAS, on June 25, 2012, the Court entered the Final Order Under Sections 105, 361, 362, 363, and 364 of the Bankruptcy Code and Bankruptcy Rules 2002, 4001, 6004, and 9014 (I) Authorizing the Debtors to Obtain Postpetition Financing on a Secured, Superpriority Basis, (II) Authorizing the Use of Cash Collateral, and (III) Granting Adequate Protection to Adequate Protection Parties [Docket No. 491] (the Original Final Order ); WHEREAS, on December 20, 2012, the Court entered the Stipulation and Order Amending the AFI DIP and Cash Collateral Order [Docket No. 2495]; WHEREAS, on February 15, 2013, the Court entered the Second Stipulation and Order Amending the AFI DIP and Cash Collateral Order [Docket No. 2927]; WHEREAS, on March 18, 2013, the Court entered the Third Stipulation and Order Amending the AFI DIP and Cash Collateral Order [Docket No. 3230]; WHEREAS, on April 17, 2013, the Court entered the Fourth Stipulation and Order Amending the AFI DIP Cash Collateral Order [Docket No. 3458]; WHEREAS, on April 26, 2013, the Court entered the Fifth Stipulation and Order Amending the AFI DIP and Cash Collateral Order [Docket No. 3534]; WHEREAS, the hearing was held by the Court on May 14, 2013 at 10:00 a.m. (Prevailing Eastern Time) (the Hearing ); NOW THEREFORE, upon the record established at the Hearing, and all objections to the entry of this Order having been withdrawn, resolved or overruled by the Court, and after due deliberation and consideration, and sufficient cause appearing therefor; ny

20 Pg 20 of 52 IT IS FOUND, DETERMINED, ORDERED AND ADJUDGED, that: 1. Petition Date. On May 14, 2012 (the Petition Date ), each of the Debtors filed separate voluntary petitions under chapter 11 of the Bankruptcy Code in the Court commencing the Chapter 11 Cases. 2. Debtors-in-Possession. The Debtors have continued in the management and operation of their businesses and property as debtors-in-possession pursuant to sections 1107 and 1108 of the Bankruptcy Code. No trustee has been appointed in these cases. On May 16, 2012, the United States Trustee appointed the Official Committee of Unsecured Creditors (the Committee ) in these Chapter 11 Cases. On July 3, 2012, the Court approved the appointment of Arthur J. Gonzalez, Esq., as examiner, and on March 5, 2013, the Court authorized the appointment of Lewis Kruger, Esq., as Chief Restructuring Officer of the Debtors. 3. Jurisdiction. The Court has jurisdiction over this matter pursuant to 28 U.S.C This matter is a core proceeding within the meaning of 28 U.S.C. 157(b)(2). Venue is proper in this District pursuant to 28 U.S.C and Notice. Notice of the Motion, the relief requested therein was given to the following parties, or in lieu thereof, to their counsel: (a) the Office of the United States Trustee for the Southern District of New York; (b) the office of the United States Attorney General; (c) the office of the New York Attorney General; (d) the office of the United States Attorney for the Southern District of New York; (e) the Internal Revenue Service; (f) the Securities and Exchange Commission; (g) Ally Financial Inc. and its counsel, Kirkland & Ellis LLP; (h) Ally Bank and its counsel, Kirkland & Ellis LLP; (i) UMB Bank, N.A., as successor indenture trustee for the Junior Secured Notes (the Trustee ), and its counsel, Kelley Drye & Warren LLP; (j) Wells Fargo Bank, N.A., as collateral agent for the Junior Secured Notes, as collateral agent for the ny

21 Pg 21 of 52 AFI Senior Secured Credit Facility, and as collateral control agent under the Intercreditor Agreement, dated as June 6, 2008 (the Collateral Agent ); (k) counsel to the Ad Hoc Group of Junior Secured Notes, White & Case LLP and Milbank, Tweed, Hadley & McCloy LLP; (l) counsel for the Committee, Kramer Levin, Naftalis & Frankel LLP; and (m) the parties required to be served under the Debtors Case Management Procedures Order (collectively, the Notice Parties ). The Court finds that, in view of the facts and circumstances, such notice is sufficient and no other or further notice need be provided. 5. Certain Findings Regarding the Use of Cash Collateral. (a) Good cause has been shown for entry of this Order. The Debtors have an immediate need for the use of Cash Collateral to pay for the Funded Disposition Costs (as defined below). Absent such payments, which are necessary to preserve the value of the remaining Prepetition Collateral (as defined herein) of the Adequate Protection Parties, the Debtors assets will quickly erode to the detriment of the Debtors estates and constituents, including the Adequate Protection Parties. The use of Cash Collateral, will, therefore, help preserve and enhance the value of the Adequate Protection Parties Prepetition Collateral and will increase the prospects for the successful resolution of the Chapter 11 Cases by maximizing the value of the Prepetition Collateral. (b) The Adequate Protection Parties are adequately protected from a diminution in the value of their Prepetition Collateral by the Debtors use of Cash Collateral to pay the ongoing Funded Disposition Costs (as defined herein) in order to preserve, maintain, and dispose of the Adequate Protection Parties Prepetition Collateral. (c) Based on the record established in the Court at the Hearing, the terms of the Debtors use of Cash Collateral, the expense allocation methodology, and the Forecast are ny

22 Pg 22 of 52 fair and reasonable, and reflect the Debtors and their respective managers and directors exercise of prudent business judgment consistent with their fiduciary duties. Entry of this Order is in the best interests of the Debtors estates and creditors. 6. Cash Collateral. The Debtors cash and cash equivalents on deposit or maintained in any account or accounts by the Debtors that is subject to a perfected security interest in favor of AFI or the Junior Secured Parties 2 and cash and cash equivalents generated by the collection of accounts receivable, sale of inventory, or other disposition of the Prepetition Collateral 3 constitute proceeds of the Prepetition Collateral and, therefore, are and shall be deemed to be cash collateral of the Adequate Protection Parties within the meaning of section 363(a) of the Bankruptcy Code for the purposes hereof and under the terms hereof (collectively, and together with all cash and cash equivalents otherwise constituting Prepetition Collateral, the Cash Collateral ). 7. Authorization of Use of Cash Collateral. Except as otherwise expressly provided herein, Cash Collateral may be used during the period from May 1, 2013 through and including the Termination Date (as defined in paragraph 12 below) on the following terms for the types of expenses set forth in the Forecast and the Horner Declaration: (a) The Cash Collateral securing each of the AFI LOC, the AFI Senior Secured Credit Facility, and the Junior Secured Notes, shall be used to fund (i) the asset monetization/preservation costs related to the assets of each of the respective collateral pools (including an allocated portion of the professionals fees and operating expenses related thereto), 4 (ii) any and all accrued and unpaid amounts 2 The Junior Secured Parties means the Junior Secured Noteholders, the Trustee, and the Collateral Agent. 3 The Prepetition Collateral includes the personal and real property constituting Collateral under, and as defined in, the documents governing the AFI LOC, the AFI Senior Secured Credit Facility, and the Junior Secured Notes. 4 Consistent with past practice, the costs are allocated based on the remaining assets of each of the respective collateral pools (based on the asset values within each collateral pool, excluding cash). ny

23 Pg 23 of 52 payable with Cash Collateral in accordance with the budgeting methodology used in the Original Final Order, which accrued prior to the closing of the Platform Sale but have not yet been paid, (iii) the Carve Out, 5 as defined in and in accordance with the allocation among the Lenders as provided in paragraph 16 of the Original Final Order, and (iv) the Adequate Protection Payments to AFI, in its capacity as lender under each of the AFI LOC and the AFI Senior Secured Credit Facility; (b) (c) The Cash Collateral securing the AFI Senior Secured Credit Facility shall also be used to fund (i) the wind down costs of the origination pipeline, (ii) the costs related to Debtor Executive Trustee Services, LLC ( ETS ) (both of which comprise collateral of the AFI Senior Secured Credit Facility and Junior Secured Notes), and (iii) advance obligations with respect to servicing agreements remaining the estate following the closing the Sales; 6 and The Cash Collateral securing the AFI LOC shall also be used to fund (i) indemnification payments to Ally Bank under the Ally Bank Servicing Agreement, with respect to modifications to Ally Bank loans made in accordance with the DOJ/AG Settlement, and (ii) any costs to service any servicing rights remaining the estate following the closing of the Sales; and 5 For purposes hereof, the Carve Out shall mean the sum of: (i) all fees required to be paid to the Clerk of the Court and to the U.S. Trustee under section 1930(a) of title 28 of the United States Code and section 3717 of title 31 of the United States Code, and (ii) at any time after the first business day after the occurrence and during the continuance of a Termination Event hereunder, and delivery of notice thereof to the U.S. Trustee and each of the lead counsel for the Debtors (the Carve Out Notice ), to the extent allowed at any time, whether by interim order, procedural order or otherwise, the payment of accrued and unpaid fees and expenses incurred by the professionals retained in the Chapter 11 Cases and reimbursement of out-of-pocket expenses of the members of any official committee appointed in the Chapter 11 Cases, including the Creditors Committee (collectively, the Professional Fees ) incurred by persons or firms whose retention is approved pursuant to sections 327 and 1103 of the Bankruptcy Code after the Business Day following delivery of the Carve Out Notice and allowed by the Court, in an aggregate amount not exceeding $25 million (the Carve Out Cap ) (plus all unpaid Professional Fees allowed by the Court at any time that were incurred on or prior to the Business Day following delivery of the Carve Out Notice, whether paid or unpaid); provided further that (A) the Carve Out shall not be available to pay any such Professional Fees incurred in connection with the initiation or prosecution of any claims, causes of action, adversary proceedings or other litigation against the Adequate Protection Parties, (B) so long as no event of default shall have occurred and be continuing, the Carve Out shall not be reduced by the payment of fees and expenses allowed by the Court and payable under sections 328, 330 and 331 of the Bankruptcy Code, and (C) nothing in this Final Order shall impair the right of any party to object to any such fees or expenses to be paid by the Debtors estates. 6 Specifically, the Debtors will use Cash Collateral of the AFI Senior Secured Credit Facility to fund advances that were previously funded by such facility. All other remaining advance obligations shall be funded with the cash remaining in the DIP Borrowers (including the proceeds of any advances not purchased at the closing of the sales), as such advances were previously funded with the Barclays DIP Facility (as defined herein). ny

24 Pg 24 of 52 (Items (a), (b) and (c) collectively are referred to as the Funded Disposition Costs ). Payment of the Funded Disposition Costs as set forth in the Forecast is authorized and approved under this Order. The Cash Collateral will not be used to pay the Debtors operating expenses or professionals fees (other than the Funded Disposition Costs), as such expenses will be funded by the use of unencumbered cash. The Debtors shall not use Cash Collateral and other Prepetition Collateral at any time, except as set forth in this Order. 8. Reporting. In lieu of the reporting requirements set forth in the Original Final Order, the Debtors shall provide the Lenders and the Committee with a 6-month monthly forecast for the following 6-month period (each, a Forecast ), and a monthly variance report for each prior month setting forth for such one-month period actual results, noting therein aggregate variances from amounts set forth for the one-month period in the relevant Forecast. In addition, the Debtors shall provide the Lenders and the Committee with a collateral report that reflects updated values as of the end of the prior calendar month (each such revised report, for the period of its applicability, to be referred to herein as the Collateral Report ). Thereafter, promptly following request by AFI, the Committee, or the Trustee, the Debtors shall make themselves reasonably available to discuss such Forecast, the Collateral Report, and the details thereof. 9. Adequate Protection. As additional adequate protection for the aggregate diminution in value of the Prepetition Collateral to the extent of the Adequate Protection Parties interests therein (the amount of such diminution in value, if any, the Adequate Protection Obligations ), the Adequate Protection Parties are granted the following: (a) AFI, in its capacity as lender under the AFI LOC, shall receive: (i) as security for the Adequate Protection Obligations, effective and perfected upon the Petition Date and without the necessity of the execution by the ny